From The Telegraph:
China's shadow banking system is out of control and under mounting stress as
borrowers struggle to roll over short-term debts, Fitch Ratings has warned.
The agency said the scale of credit was so extreme that the country would find
it very hard to grow its way out of the excesses as in past episodes,
implying tougher times ahead.
"The credit-driven growth model is clearly falling apart. This could feed
into a massive over-capacity problem, and potentially into a Japanese-style
deflation," said Charlene Chu, the agency's senior director in Beijing.
"There is no transparency in the shadow banking system, and systemic risk
is rising. We have no idea who the borrowers are, who the lenders are, and
what the quality of assets is, and this undermines signalling," she
told The Daily Telegraph.
While the non-performing loan rate of the banks may look benign at just 1pc,
this has become irrelevant as trusts, wealth-management funds, offshore
vehicles and other forms of irregular lending make up over half of all new
credit. "It means nothing if you can off-load any bad asset you want. A
lot of the banking exposure to property is not booked as property," she
said.
Concerns are rising after a string of upsets in Quingdao, Ordos, Jilin and
elsewhere, in so-called trust products, a $1.4 trillion (£0.9 trillion)
segment of the shadow banking system.
Bank Everbright defaulted on an interbank loan 10 days ago amid wild spikes in
short-term "Shibor" borrowing rates, a sign that liquidity has
suddenly dried up. "Typically stress starts in the periphery and moves
to the core, and that is what we are already seeing with defaults in trust
products," she said.
Fitch warned that wealth products worth $2 trillion of lending are in reality
a "hidden second balance sheet" for banks, allowing them to
circumvent loan curbs and dodge efforts by regulators to halt the excesses.
This niche is the epicentre of risk. Half the loans must be rolled over every
three months, and another 25pc in less than six months. This has echoes of
Northern Rock, Lehman Brothers and others that came to grief in the West on
short-term liabilities when the wholesale capital markets froze.
Mrs Chu said the banks had been forced to park over $3 trillion in reserves at
the central bank, giving them a "massive savings account that can be
drawn down" in a crisis, but this may not be enough to avert trouble
given the sheer scale of the lending boom.
Overall credit has jumped from $9 trillion to $23 trillion since the Lehman
crisis. "They have replicated the entire US commercial banking system
in five years," she said....
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